Wednesday, November 23, 2016

Malaysia holds rate, turns slightly optimistic on outlook

Malaysia's central bank left its benchmark Overnight Policy Rate (OPR) at 3.0 percent but struck a slightly more optimistic tone about the outlook for the country's exports based on an improved outlook for the global economy and comforted by better-than-expected third quarter growth.
Bank Negara Malaysia (BNM), which in July cut its rate for the first time since March 2009, said exports are expected to "expand" but still constrained by soft demand from Malaysia's key trading partners, a more optimistic view than in September when it said that "export growth is expected to remain weak following subdued demand" from its key trading partners.
BNM also said that the "risk of destabilizing financial imbalances has been contained" - an observation that was new in comparison to its September statement - and a reference to the shift in global financial markets since the U.S. Presidential election that triggered intervention in foreign currency markets by Malaysia and other Asian central banks.
On the global front, BNM said estimates for global growth in 2017 had improved, as the "prospect of a shift towards progressive use of fiscal policy in the developed economies could lead to a more balanced policy environment that would support growth going forward."
However, the central bank also cautioned of "uncertainty arising from risks of protectionism and financial market volatility," a clear reference to ideas by U.S. President-elect Donald Trump about changing global trade in favor of the U.S.
Malaysia's Gross Domestic Product grew by a better-than-expected annual rate of 4.3 percent in the third quarter of this year, up from 4.0 percent in the second quarter and reversing five quarters of decline.
Growth was supported by private sector activity and exports that grew 5.9 percent, up from a 7 percent drop in the second quarter.
BNM said the private sector will remain the driver of growth as consumption is sustained by wage and employment growth, along with support by government measures to raise income. Although investment is moderating, it will be supported by infrastructure investments and exports will expand but still be constrained by soft demand from trading partners.
Malaysia's inflation rate was steady at 1.5 percent in September from August and BNM expects it to be at the lower end of the 2.0-2.5 percent range forecast for this year, a slight change compared with its September statement when it forecast that it would be at the lower end of a 2-3 percent range.
Malaysia's ringgit, along with many other emerging market currencies, dropped sharply in the days following the election of Donald Trump, and the central bank said these "sharp adjustments and significant volatility" could result in periods of volatility in regional financial and foreign exchange markets.
"In this regard, Bank Negara Malaysia will continue to provide liquidity to ensure the orderly functioning of the domestic foreign exchange market," BNM said.
In the days following the U.S. election, the ringgit fell to levels against the U.S. dollar not seen in 12 years and remains weak. But it has been depreciating since mid-April and was trading at 4.44 to the dollar today, down from 4.18 on the day of the election but up from lows of 4.48 seen on Nov. 11.
Compared with the start of the year, the ringgit is down only 3.2 percent.

The global economy continued to grow at a moderate pace. Economic activity in major advanced economies has improved but remains moderate. In Asia, growth has been supported by domestic demand amid persistent weakness in the external sector. Looking ahead, the baseline estimate is for global growth to improve slightly in 2017. The prospect of a shift towards progressive use of fiscal policy in the developed economies could lead to a more balanced policy environment that would support growth going forward. Nevertheless there is uncertainty arising from risks of protectionism and financial market volatility. Heightened financial market volatility in recent weeks has had an adverse effect on various asset classes, exchange rates and yields across many emerging economies. Global financial market conditions are likely to be susceptible to policy and market developments.

The domestic economy continued to expand in the third quarter of the year, driven mainly by private sector activity with some support from net exports. Going forward, private sector activity will remain the key driver of growth. Private consumption is expected to be sustained by continued wage and employment growth, with additional support from Government measures to increase disposable income. Investment activity, although moderating, will be supported by on-going infrastructure investments and capital expenditure in the manufacturing and services sectors. On the external front, exports are expected to expand but will be constrained by soft demand from Malaysia’s key trading partners. Overall, the domestic economy remains on track to expand as projected in 2016 and 2017.

Headline inflation for 2016 is expected to be at the lower end of the projected range of 2.0% – 2.5%. Inflation is expected to remain relatively stable in 2017 given the environment of low global energy and commodity prices, and generally subdued global inflation.

The ringgit, along with most emerging market currencies, has experienced sharp adjustments and significant volatility due to continuing uncertainties in global economic and policy environment, and geopolitical developments. These factors could result in periods of volatility in the regional financial and foreign exchange markets. In this regard, Bank Negara Malaysia will continue to provide liquidity to ensure the orderly functioning of the domestic foreign exchange market. The capital market remains accessible, deep and liquid. Banking system liquidity is ample. Financial institutions continue to operate with strong capital and liquidity buffers and the growth of financing to the private sector is consistent with the pace of economic activity.

At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy. The risk of destabilising financial imbalances has been contained. However, the MPC will be monitoring these risks to ensure the sustainability of the overall growth prospects.

The meeting also approved the schedule of MPC meetings for 2017. In accordance with the Central Bank of Malaysia Act 2009, the MPC will convene six times during the year. The meetings will be held over two days, with the Monetary Policy Statement released at 3 p.m. on the second day of the MPC meeting."